Being a lender is risky because they face many challenges and concerns when people want to get a business loan. One of the challenges that they face is called loan stacking. Find out more about the risks of loan stacking and the alternatives available.
Loan stacking is where someone takes out multiple loans from different banks at the same time and letting the amounts “stack”. Business owners that do this think it is a good thing because they think the more money the better. The issue with this is that you will only get caught up in high payments. Having multiple loans at the same time can impact the borrower’s ability to afford the payments in a negative way. If the borrower cannot repay, lenders will not get their money back.
Dangers and Risks for Lenders and Borrowers
The risks that a small business owner faces from loan stacking is having a lot of pressure on the cash flow of the business due to having multiple loans and the possibly of violating terms of the first loan which would force that loan into default. This will make it harder for you to qualify for a business loan in the future. Lenders may not lend to you due to the loans you have previously stacked.
From the perspective a lender, loan stacking increases the risk that the borrower will default on their loan, so they are more hesitant to lend. Some borrowers do not have a good intent and will loan stack intentionally and just never pay them back.
Alternatives to Loan Stacking
It makes sense why there is temptation for business owners to stack multiple loans. There are a lot of expenses that a business incurs, and they can be expensive. However, there are alternatives you can choose from rather than loan stacking to help you get the funds you need.
- Ask for more funding from your current lender: you can simply ask your current lender for more funding. They might approve you if it is under the right conditions. Be prepared with a plan on why you need more funding and why you deserve it. When you meet with your lender, they will look at your debt service coverage ratio. You need to have a DSCR of at least 1.2 to be eligible for additional funding. If yours is not, you will need to work on improving the ratio so you can be approved.
- Refinance your business loan: you can apply for another loan from a lender that is less expensive. You can have one loan and a lower interest rate by having the new lender pay off the old one. The advantages of refinancing include lower payments and a shorter term, however it can come with high transaction costs and interest payments.
- Combine loans: it is possible for two different loan products to coexist together and not be considered loan stacking. For example, a business credit card can work with a loan, equipment financing and a loan or line of credit can work together. These combinations work because the borrower uses the funds for different reasons.
- Reduce your expenses: if you are looking for more funds, maybe you can analyze your expenses and see if there are any costs that you can cut or minimize to help out. Some things to consider looking at are your utility bills, negotiating with vendors to lower costs, location of the business and much more.
The Bottom Line
It can be tempting to loan stack but there are many disadvantages to doing so. You can risk your business being in serious financial trouble. Remember the alternatives that you can do instead of loan stacking to avoid any problems receiving funding in the future.